Q and A from PayScale webinar series: Compensation Budgeting

PayScale recently hosted a three-part webinar series all about Compensation Budgeting, presented by yours truly. Part one was all about managing pay inequities. Part two taught attendees all about raises, and part three showed how to pull it all together using PayScale Insight. If you missed any of the webinars, you are welcome to view the recordings. Since this is a topic of interest to so many of our Compensation Today readers, we're posting my answers to many of the questions received after the webinars here. Enjoy!

Q: What is the difference of using the Base Mkt 50th or the Average?A. The 50th percentile of the market is the same as the median of the market. It’s the middle number in a range of values. Using the 50th percentile, when comparing with the market, will put your pay near where most people’s pay are – it will essentially help smooth out the very high or very low values.

Q: Can you suggest some reliable websites for data on labour markets in Canada and US?A. PayScale has very reliable data in most English-speaking countries, including both the US and Canada.

Q: Does pay ever go down in positions that are hot now but may be slower in the following years?A. Market pay will definitely show a downward trend when the position is no longer hot, or in positions that are becoming less critical. That said, just because market pay declines doesn’t necessarily mean your employee pay should decrease. There are many factors to take into account, not the least of which is employee motivation and satisfaction. One option to consider is that you can offer a temporary market premium as positions are hot in the market. Then it’s easier to take that premium away if needed at a later date. The impact of that, while strong, is often more understandable to employees than attempting to decrease base pay.

Q: How do you address COL differences?A. Paying to market takes a lot of things into account, including cost of labor, cost of living, the demand for various positions that are critical in the market, key industries that operate in that labor market. Because of this, paying fairly to market will automatically take COL into account. This is true whether you’re thinking that it’s necessary to make COL adjustments between different geographies or COL adjustments from year to year. In either case, paying fairly to market supersedes COL adjustments.

Q: What are some of the factors to consider when determining which adjustment would be most appropriate (e.g., grade level change, pay change, both)?A. Great question. Here are a few questions off the top of my head:

What’s the impact on the budget if you do/don’t make the change? How far apart are the market and the position?

What will the impact be on morale if you do/don’t make the change? Can you afford to lose people if you do/don’t make the change?

How wide-spread are the changes that are needed? Can your organization bear that (or any) change right now?

How permanent does the change need to be? Can you fix it with a temporary bump?

Where are you in your evaluation cycle?

In thinking about moving ranges vs just positions, are most trending up or is there a pretty good mix of the two?

What’s the actual value of the position in the market? Internally? Some positions just don’t make sense at higher than a certain grade.

Q: What is EEO?A. Equal Employment Opportunity. Some organizations are required to prove non-discrimination in their treatment of individuals (from recruitment, to hiring, to promoting, to fair pay, to ending employment, and all steps in between). This is why it’s critical to ensure that fair pay is happening at the individual level.

Q: When determining significance of disparity you used an example of range spread. Do you mean the range spread of the current structure or the range spread created by analyzing the specific individuals?A. I think a good guideline is to look first at the range spread for the position. Typically this will differ depending on the level. For example, a range spread of 30-40% is typical at the base of the structure, while spreads of 60-70% are more likely at the top of the structure. Then take a look at the spread between the actual incumbents. I would be anxious in the cases where the pay spread of employees is either far greater or far less than the position range spread. Obviously the higher up you go, the fewer incumbents there are for comparison.

Q: Which is better, to have differentiation between dept. in pay scale or have every dept. to have same pay scale but differentiate their benefits i.e. bonus?A. Without more specifics, I’d say this is hard to answer. I do believe that the types of people that are drawn to various different jobs have different priorities in how they want to be paid. This is typically, but not always, influenced by either generation or life stage as well. So, in broad sweeping generalizations, sales people are typically drawn by high potential pay (bonus/commission) vs. high stable pay. Finance folks are typically drawn by high stable pay with some bonus potential. Also, folks who are earlier in their career are more likely to be drawn by a higher percentage of pay at risk (variable, bonus, etc.) than those with more at stake outside of work (i.e. family, house & car payments, etc.). Because of these differences, it may make sense to do a bit of both – differentiation in base pay and in the mix of base to variable pay.

Q: You suggested moving positions up a grade to respond to the market but shouldn't the grade be determined by the role and not the market?A. I have a couple of thoughts here: First, it will depend on what your primary alignment is, when you determine how you want to pay. If you decide you prioritize fair internal pay, then you’d want to make sure your position is in the right grade relative to other positions. If you prioritize fair pay to the market, then you want to make sure your position is in the right grade based on the market value. Most will do some combination of the two, using one to guide placement of the position, and the other as checks and balances.

Second, paying fairly to the market, if done right, will include an element of making sure the role is defined well (years of experience, level of responsibility, degree requirements, special skill-sets, etc.)

Q: Can you explain range penetration again? What range do we want to see them in as acceptable?A. Range penetration is the distance the employee has moved through the range. 0% range penetration is the min of the range. 50% is the mid. 100% is the max. We want them to be where they belong based on your comp priorities. If you prioritize performance, market, and then tenure, and you have an incumbent who is tenured and performs average to great, I’d expect them to be in the top third of the range (67-100% range penetration). In the same scenario, an employee who is new, or doesn’t perform as well would be in the bottom third (0-33%).

Q: How do you break spreadsheets out by job title, department, program, or service line, etc?A. The way the spreadsheet is organized should depend on who will be reviewing, adjusting, or approving each segment. Typically it’s broken out by department, and includes title and employee name.

Q: If we approve a 3% increase how do we determine what percentage each will receive?A. There are a couple ways to determine how to allocate the 3% across your employees. The first, in PayScale’s Insight software, is to use the Raise Recommender. Otherwise, you can build a merit matrix in Excel to determine how to allocate based on position in range and performance.

Q: How do you adequately reward high performing employees who are close to or above the range max?A. Great question. I think it’s both important to pay based on the value of the position and to reward high performers. I would increase base pay to the top of the range and then provide a lump sum bonus to honor the strong performance of the incumbent.

Q: How to you determine appropriate pay increases for employees being reward with a bump in title from Manager to Director, but who retain largely the same responsibilities?A. Ahh. This is a tough question. I think it’s important to call a spade a spade. If the responsibilities are largely remaining the same, I would probably not move the title. If it’s necessary to change the title, I would give just a nominal increase to correlate with the nominal change in responsibilities.

Q: When you have Directors who conduct program work but each are in different states, i.e., DC, NY, CA, HI , NC, how do you determine the increase?A. I would use the states to determine the initial pay for the Directors relative to the local markets (or a national market if that makes more sense for your positions). Then when it becomes raise time, I would use the appropriate increase for each individual based on their position in range and performance.

Q: When referring to the range penetration, how do you determine if the range penetration is reasonable to an individual employee?A. Good question. As I mentioned above, I would expect employees to fall at certain places along the range based on a few factors: performance, tenure, proficiency, skillset, etc. So, for example, if someone is new to the organization, I’d expect them to be in the first third of the range (0-33%). Someone who has stellar performance, is proficient in their role, and has been with the organization for a few increase cycles or more should fall in the top third of the range (67-100%).

Q: When budgeting, does HR need to do the worksheets for every single department?A. Each organization divides the workflow differently. I would say that generally, the department that handles payroll is an ideal department to prep the worksheets. Sometimes this is HR and sometimes it’s accounting.

Q: What is a reasonable compa-ratio?A. Reasonable compa-ratio will depend on whether we’re talking about the full organization, a team or department, or an employee. The full organization would ideally fall close to 1 (give or take). I’d say 0.95-1.05. The team or department may have slightly more flexibility, so I wouldn’t “worry” until it was outside of 0.9-1.1. A team or department may be newer, you may have a more aggressive strategy for that team, or you may have a very highly tenured team, for example. An employee should generally fall between 0.8 and 1.2.

Q: I would like to know more about how to go about evaluating the org level ... adjusting the ranges ... is this all together or do you recommend doing it by position type?A. Great question. I would say that it’ll depend on your organization and your structure. Some organizations have a natural split between their functions and create separate structures to accommodate. Some examples are Faculty/Staff, Engineers/non, Exec/Staff, etc. In those cases where the structures are separate, I can imagine adjusting the ranges for one part but not the other. If your positions all exist on one structure, I would either adjust all the ranges or not. If you decide not to move all the ranges, then you can consider adjusting just the positions (and move them to a new grade assignment).

Q: What is a good way to get market surveys?A. I may be biased, but I think the best place to get current, accurate, detailed market data is PayScale. Otherwise, you can check with other professionals in your industry to see where they get their market data.

Q: How do you communicate a "market premium"? Something you share with employees?A. The level and type of communication will really depend on how transparent you intend to be with your employees. I think it shows that your organization is on top of the market and their comp plan, and is therefore a retention, motivation, and also attraction tool to be able to communicate to your employees that you offer a market premium when jobs are hot. In terms of how to communicate it: I would have the manager explain the premium to the employee, giving real data about what’s going on with the position in the market and how the organization is being proactive because they really value the employee and want to ensure that they feel valued.

Q: How is range penetration different than compa-ratio?A. Technically range penetration talks about how far the employee has moved through the range [(EE Pay-Range Min)/(Range Max-Range Min)]. It differs from compa-ratio in that compa-ratio is looking at how an EE’s pay relates to the midpoint of the range (EE Pay/Range Mid). Compa-ratio (especially at the low and high ends) won’t give you the information about whether an employee is in range or not. That said, in the aggregate, a compa-ratio is very helpful because it’s easier to compare with the market-ratio (a calculation of how the organization, department, or individual is doing relative to the market).

Q: What does the 41% range penetration tell us about that example organization's pay situation?A. When coupled with the information about where the employees fall in range, it would tell me that the organization has room to move people up in their ranges, but that, for the most part, their employees fall within range. I can think of a few good cases in which this might happen: the ranges were just shifted upwards so the employees are now lower in range, the staff tends to be more junior in the roles for which they were hired, or the staff is less tenured.

Q: In my organization, we do not have a comp grid, there is a lot of pay compression... what would you suggest the approach should be to correct this?A. I think it will depend on whether you want to build a compensation structure for your organization or not, and if so, how formal do you want it to be. Generally, the first step in remedying pay compression will involve setting up some sort of compensation structure for your positions. I’ve worked with small organizations that set up formal comp structures and large ones that don’t, so whether or not a structure will work for your organization really will depend on your org culture. If you decide that a structure that includes grades and ranges won’t fit your org culture, it’s still possible to set up ranges for each position, and to look at where those ranges fall relative to one another by position.

The second step would be to ensure that your employees fall in the correct place within range based on their performance, experience, tenure, proficiency, skill set, etc.

Q: We don't have any ranges in our compensation plan. How do I start setting up ranges?A. We have a blog and a webinar that detail how to set up ranges. They provide a good start. If you need more support as you do so, PayScale’s Expert services can either guide you through the process or build the ranges for you.

Q: Question for after seminar: the PayScale tool which allocates is this a portal / system that is purchasable? Or is only for PayScale?A. The Raise Recommender tool (merit matrix) is built into the Insight subscription service. You can learn more about all the compensation planning and management features of Insight here. You can also watch the recording of part three of the budgeting series, that shows exactly how Insight's features help with budgeting and raises.

Q: When you get rid of the green outliers, this means that the compa-ratios would now be lower for those not moved, correct?A. The answer depends on which compa-ratios you’re looking at. Employee compa-ratios for those not moved wouldn’t change since you’re comparing the employee pay to the midpoint of the range. When you eliminate the green outliers (presumably by bumping them up to the bottom of the range, not letting them go from the organization), the compa-ratio for the department, org, or position would be higher because the average EE pay would be higher.

Q: What is a common percentage for adjusting current salary against market?A. A common pay increase percentage for the full org/budget is typically 3%. I would expect to see that allocated so that some employees are receiving less than 3% (usually 1% or greater), and some are receiving far greater than 3%. Typically I don’t see higher than 7-8% for an increase when there isn’t also a promotion.

Q: Is this evaluation process important to do every year? Even when the financial state of the company is poor?A. I do think it’s important to do the evaluation process every year, regardless of the financial state of the company. Knowledge is power. Rather than assuming that the organization is falling out of line with the market, doing the analysis every year provides the company with the knowledge of whether they are or not. I’ve worked with a lot of companies who fear the “truth” of where they are, only to be pleasantly surprised that they’re not as far as they thought. Without that knowledge, it’s entirely possible that the org. may represent itself as being off track, rather than confidently saying “we’re ok.” The danger, essentially, is that the wrong message may be conveyed to the employees – and once employees believe they may be underpaid relative to the market, it is extremely hard to overcome that sense and convince them that they’re being paid fairly.

On the other hand, if your organization is falling out of line with the market, doing the evaluation every year will give you the information about how to proceed when you do get a budget again. What are your critical areas? If you can squeeze another few dollars out of the budget, to which key positions should they be directed? And, perhaps most importantly, you can be strategic about how you message this to your employees as well.

Q: On your summary page, where is the merit increase cost identified?A. In this case I used “Pay Increase Adjustments” interchangeably with “merit increase.” The cost would be $450,000.

Q: In your timeline what would be the timing of the performance reviews?A. The reviews would need to be completed anytime prior to the creation of the master spreadsheet. In this case, prior to 10/15. The advantage to doing reviews on an annual basis after Q3 is that the goals are fresh in employees’ minds going into Q4, and that there is some distance between the performance evaluation conversation and the compensation review conversation. This way the performance review is truly about performance, without the distraction of pay.

Q: Would you recommend doing performance increases all at once and then evaluate to the market or to do both at the same time?A. I would recommend doing both at the same time, if budget allows. Otherwise, you may end up either doing double increases or not increasing enough for a high performer.

Q: At the employee level how do you determine a critical issue or disparate pay? In this case its about a 20k difference. Is there a standard of a certain dollar amount issue or is it standard deviations from average, etc.?A. The amount of difference will depend on a couple things – the level of the position and the width of the pay range. Typically it’s calculated in terms of a percent difference rather than a dollar difference. A spread of $20K with average pay of $40K is very different from a spread of $20K with an average pay of $100k.

Also, because ranges tend to be broader at higher levels, the acceptable percent difference at higher levels will be bigger than at lower levels. In an entry level job, something greater than 30% probably merits further review. At higher levels that threshold could be 40-50% or more!

Q: Can you talk about compression issues: what percentage between report and manager is indicative of compression?A. This will depend on how far apart your report and manager should be based on the size and shape of your structure. Ranges are typically 10-15% apart from one-another at the midpoint, so if your report and manager are 1 grade apart, their pay should be different by at least 10-15%. If it’s 2 grades, then 20-30%, and so on.

Obviously this is a guideline and doesn’t always work. If you have a new manager and a tenured employee, it could be possible that the employee is at the top of the range and the new manager is at the base of the range.

Another factor is the type of position. In some arenas, the technical knowledge required of the individual contributor is actually greater than the technical knowledge required of the manager. In some cases, the pay would then actually/appropriately either overlap or be higher for the individual contributor role.

Q: What is current COLA now a days?A. As mentioned in the questions from Part I, Cost of Living Adjustments are becoming out of mode in favor of doing market-based pay that will automatically always include Cost of Living as one of the factors in calculating increases. Other factors are demand for the job, cost of the job in the local market, and things relating specifically to the employee (performance, proficiency, tenure, skillset, experience, certification, etc.)

Q: How would you handle the situation when an employee hits the max for their pay grade?A. How you handle maxed out, or red-circled, employees will depend in part on your company culture and compensation philosophy. Organizations who value performance will often offer a lump-sum bonus to those employees who are at or above the top of their range, based on a clear set of criteria, so that they can continue to be rewarded for their contributions. Other orgs will freeze base pay until the market catches up and the ranges are adjusted. Some will offer “top of scale” bonuses to continue to incent staff. Organizations are getting creative about how to handle red-circled employees. The key is to freeze the base pay so that you’re not exponentially increasing their base pay out of range so that the market will never catch up.

Q: Do you think you should get at least 3 market analysis surveys to work from?A. It will really depend on where your initial source comes from, and any guidelines that may exist in your industry/company. For example, because PayScale data is so robust, it’s not necessary to have additional sources. Sometimes it’s helpful to have an additional resource for the critical positions, or positions that are unique to your organization. There's a lot of information about evaluating which salary surveys are right for you in this guide.

Q: What recommendations do you have for a wage and salary program for a young but rapidly growing company? A. One of the beautiful things about building a structure is the ability to plug jobs into the structure as you grow. I’d say keep your potential for growth in mind as you build out your structure so that there are plenty of grades into which to differentiate your new jobs as you add them.

Q: What is the best way to handle raises when the company is transitioning from an anniversary review to an annual (focal) review?A. My assumption is that the question here is about the timing. I think it would be helpful to plan out the timing for the transition so that you can group people in quarter increments. Six months before the transition you might give an increase that is half of what it would be, and give a second half at the focal review time. A quarter before the new focal review time you could consider giving a one time bonus to those who are performing well, and then the full increase at the focal review time. You will then end up doing some increases early and the amount of those increases can be prorated depending on how early they are.

I hope you took something away from the budgeting webinar series and this Q and A that will help you move into 2014 with confidence. Here are a few additional resources you may want to know about: